Public Bill Committee

[Sir Roger Gale in the Chair]
Written Evidence to be reported to the House
EN 34 E.ON supplementary evidence
EN 35 EEF

Clause 35

Power to modify licence conditions etc to facilitate investment in electricity generation

Alan Whitehead: I beg to move amendment 124, in clause35,page21,line15,at end add—
‘(4) The Secretary of State may not exercise the power in subsection (1) in such a way that confers an advantage upon one land-based low-carbon generation technology over another.’.

Roger Gale: With this it will be convenient to discuss new clause 4—Market access for independent renewable generators—
‘( ) The Secretary of State must exercise the powers conferred by this Chapter so as to establish an auction market (the “green power auction market”) in which generators are entitled to offer, and holders of supply licences are entitled to bid for, electricity generated from renewable sources.
( ) The Secretary of State must exercise those powers, and take such other steps (including the exercise of any other power conferred by or under a provision of this Part) as the Secretary of State considers necessary, for the purpose of ensuring that—
(a) the green power auction market begins to operate when the first CFD is made and does not cease to operate until expiry of the last CFD that has been made; and
(b) the reference price under a CFD entered into by a generator who is a party to an agreement made through the green power auction market is based on the price payable to the generator under that agreement.
( ) In this section—
“CFD” means a contract for difference as specified in subsection 2(a) and (b);
“supply licence” means a licence under section 6(1)(d) of EA 1989.’.

Alan Whitehead: These two provisions have slightly different purposes, but they are linked in terms of how the clause works. I will detain the Committee briefly on amendment 124, which would ensure that the powers in the clause are not exercised in such a way that they confer particular advantage on one land-based low-carbon generation technology. It is based on the assumption that we do not pick winners and, indirectly, on the suggestion that, as far as strike prices are concerned, no low-carbon generation on land can be advantaged in such a way as to make the arrangements disproportionate.
That would be a useful brake on the Secretary of State at the point at which decisions are made on administrative allocation, as opposed to subsequent auction. The Secretary of State would need to be mindful of the relationship between land-based technologies, and would not, in deciding the administrative allocation, decide on a strike price or series of arrangements that so advantaged one low-carbon land-based generation technology over another that the subsequent allocation and operation of contracts for difference was distorted. That would be a useful addition to the Bill. There are other ways such an outcome could be assured, but these provisions are one possibility.
I want to spend a little more time talking about new clause 4, which concerns market access for independent renewables generators. It addresses a potentially serious and possibly terminal problem that may face independent generators when the Bill comes in. As matters stand, independent generators—those that do not have the advantage of vertically integrated generation, wholesale, supply and retail operations—tend to have reasonable access to the market. That is because of the renewables obligation certificates system and, consequently, the availability of power purchase agreements when those independent generators seek to supply energy. A power purchase agreement is essentially a long-term agreement that the power provided by a generator will be purchased over a period of perhaps 12 or 15 years. Having that power purchase agreement means that, among other things, an independent generator has an effective guarantee, in particular for financing a project. Should that project go onstream—be undertaken, be financed and be built—then those who might finance it can be assured that it will work subsequently, as far as the output is concerned. With a renewables obligation in place, there is a clear incentive for those who are purchasing that power to enter into an agreement, because there is something in it for them—that is, they receive the certificates that enable them to undertake their obligation—so that is win-win all around.
Under CFDs, whatever other advantages there may be overall in their operation, it is quite clear that there is no obligation to purchase. Hence, that impulse to operate power purchase agreements on the part of those purchasing the power will disappear. Indeed, we have already seen in the market that PPAs are in serious decline, and the Department has recognised that to the extent of introducing a consultation, only a little while ago on, to puzzle out the reasons for the strange disappearance of PPAs and what might be done about it. I am afraid that, as matters stand, the consultation does not appear to have come up with any particular resolutions on why PPAs are in decline, although it does suggest that in the future some kind of auction market might be introduced as a back-stop, if PPAs continue not to function.

Michael Weir: I am listening carefully to what the hon. Gentleman is saying, and I mostly agree. One concern expressed about back-stop powers, however, is that by the time they are available for use the industry may have disappeared, unless a change ensures greater access to smaller generators.

Alan Whitehead: I did not spot the hon. Gentleman in my office when I was writing my notes on the amendment, but he must have been there, because that is exactly the point I am coming to, which is, as he emphasised, the question of how the back-stop that is now proposed in the Bill, although it was not previously, may well be insufficient to deal with the issue, given what some people consider the situation might be. The reason for the back-stop to be in legislation is so that the Secretary of State, if things do not go very well after CFDs are introduced—not to put too fine a point on it—may take measures, for example, to introduce an auction market at a later date, on review of how things are going. The difficulty for independent generators, facing such new circumstance in which ROCs are replaced by CFDs, is that they cannot effectively get a CFD unless they are already selling into the market. If an independent generator is seeking to bring a project to market, it would not know whether it will be able to sell any of its power in such circumstances and it would not know whether it can get CFDs at all.

Robert Buckland: Following on from that uncertainty, it would be difficult, would it not, for investors and independents to obtain funding from banks, which themselves need certainty to know whether a project is viable? The question of viability, therefore, is one that needs to be addressed, and the option we are discussing is one that needs to be considered seriously by the Government now. Does the hon. Gentleman agree with that?

Alan Whitehead: Indeed. It is astonishing that two hon. Members must have been in my office when I was putting my notes together, because the hon. Gentleman is exactly right. When independent generators seek to bring a project to market, one thing that they will probably do further down the line when they get their planning permission and finance together is to ensure that they can guarantee that the project is viable, which the financing will require. The fact that the project will sell once it is introduced is an essential part of proving viability. Therefore, if we reach a situation where such projects simply cannot demonstrate their viability, but a person may intervene in such a way that improves the viability, that will be too far down the line. They need to prove that viability when they seek to establish their project, not after the project has crashed, burned and disappeared and needs someone to come along and proffer a solution that may pick up the pieces.
As the hon. Gentleman emphasises, the problem is particularly serious when the transition takes place. Frankly, the solution put forward—welcome though it is in some ways—essentially says, “Let’s see if the patient dies, because we can then send for an undertaker,” rather than sending for an ambulance when the patient is not well. We need better than that. Independent generators will probably provide 70% to 80% of the necessary finance for smaller-scale projects—particularly land-based projects, but also some offshore—over the next period.
In the run-up to the Bill, I wholeheartedly endorsed the repeated emphasis in the White Paper and the draft Bill that the legislation would seek to introduce new entrants to the market, to diversify how supply was undertaken and to ensure a healthy market and a range of operators other than the vertically integrated big six that already exist. It is unlikely that the big six will carry the burden of investment in new projects by themselves. Indeed, it is essential that independents play a substantial role in getting those new projects under way. At the moment, however, it is distinctly possible that a perverse outcome quite opposite to the hopes and wishes of the legislation could happen, because vertically integrated operators have no problems in accessing the market. They do not have problems, for example, of balancing the product when they get to market, because they can offset such costs within their internal vertically integrated arrangements. They do not have the problem of selling their products, because they can use bilateral deals essentially within the company structure.
Independent generators therefore have a particular issue. As we move to CFDs, they will simply be shut out from the market and from the process of getting their projects away in the first place so that they can access the market.

Robert Smith: At the risk of making his room seem even more crowded, I wondered whether he had also addressed Ofgem’s liquidity review and the fact that that was probably aiming at solving other problems, and was not necessarily a solution to this problem.

Alan Whitehead: Yes, indeed. Ofgem’s liquidity review will essentially, one hopes, result in a far greater amount of deals being known and transparent. It will therefore give a quantum assurance about likely prices for deals, and enable a wider range of those people who are coming into the market to make deals to do so on a known, fair basis. I welcome this, but whatever the future transparency of those deals may be, it does not have an impact on the issue of an operator, even an existing one, being forced to strike a deal on the basis of what might look like a power purchase agreement, but is actually so disadvantageous to achieving the reference price that they cannot make any money out of the arrangement in the first place, because that would-be power purchase agreement is not assured by the renewables obligation arrangement. In that situation, having transparent deals which do not work is no more advantageous than having non-transparent deals which do not work. Therefore the hon. Gentleman is absolutely right that it is not something we should refer to in seeking a solution to this particular problem.
As I have mentioned, the Government put a back-stop arrangement in this legislation. I believe this needs to be amended so that there are arrangements right from the start of the new era CFDs to give some assurance—not necessarily on the basis of PPAs—that those independent generators can actually work through the process of getting to market in a viable way. That is something which acts as a demonstrable instrument in place of PPAs at the point at which projects are seeking finance. The amendment proposes that the Government instigate a green power auction market, which would be a short-term auction market with a term of twice a year. It would be linked to CFDs and a reference price, so that as a result of access to that auction market generators who do not necessarily have, say, BBB+ credit ratings, would be able to ensure that their product would be auctioned. Access to that stable auction market over a period of time—albeit in chunks—would become the equivalent of a long-term power purchase agreement on a stable basis. Therefore, among other things, it would very substantially damp down the problem of balancing that generators would otherwise have to deal with.

Robert Buckland: To reinforce the hon. Gentleman’s point, having it twice a year would mean that if the independent was not able to succeed with regard to an auction, the lender—a bank—would potentially be looking at a six-month period during which there would be turnover difficulties. This is a much shorter window, and a defined window, that could allow them more security when it comes to lending to independents.

Alan Whitehead: Yes, indeed. It appears that a short-term auction market actually provides a number of advantages, as it were a replacement win-win, for the PPA arrangements related to the ROCs that were there previously. As the hon. Gentleman correctly states, it both reduces risk, because it is a repeated and known market, and once the market has been established it has the virtual effect of being a long-term arrangement. That indeed reduces the risk as far as balancing is concerned, and enables those independent generators with lower credit ratings to give gold-plated assurances about their viability that they otherwise may not be able to do. That has a number of important advantages as far as the new system is concerned, but it is essential that that starts from the beginning of CFDs rather than being used as a rescue package should things fail to materialise otherwise.
The result of a short-term auction market will probably see many independent generators getting their projects to market over the coming years, and they will get their products to market at a far lower cost—if they had got them to market—than would have otherwise been the case. The bottom line of that will be a saving to consumers, because the knock-on risk costs related to balancing and the deals that can be made relative to reference price all land back in the consumer’s bill by means of charges. Perhaps, to have a £70 million to £80 million saving on what might otherwise be the case seems to me not just a win-win, but a win-win-win situation for future arrangements—[Interruption.]. Win-win-win—it is win power.
I hope that, even if the Minister cannot accept the exact terms of the new clause, he will assure me that the Department will look closely at these arrangements or, perhaps better still, give an indication today that that is the direction that the Department is minded to go on the important area of independent generation. Then, at least one of the important aims of the Bill, to ensure a diverse series of supply arrangements that enable operators of all sizes—not just vertically integrated companies—to work well in the market to the advantage of consumers and our energy security, can be achieved.

Robert Smith: I thank the hon. Member for Southampton, Test for tabling the new clause, which focuses the Committee’s mind on independent generators. As he pointed out, we do not want to have to rely just on the big six to provide our energy investment; we must attract a wider range of generators if at all possible. As I said in my intervention, the feeling is that while the Ofgem liquidity review will help to provide transparency, it will not help to address the investment climate for this market.
The final point the hon. Gentleman made was on the calculated benefit to the consumer. If we can create a market that maximises investment while keeping prices for the consumer as low as possible, we will get the win-win that he is so keen to promote. I hope that the Minister will reassure us that the Department is addressing this issue and that it recognises the problems that independent generators foresee from the proposals before us.

Luciana Berger: I do not wish to detain the Committee for any longer than necessary. I had intended to make my comments in the clause stand part debate on Tuesday, but with the Chair’s permission I will make them now, because they are an extension of those made by my hon. Friend the Member for Southampton, Test and the hon. Member for West Aberdeenshire and Kincardine.
 The Chair  indicated assent.

Luciana Berger: Thank you. Clause 35 enables the Secretary of State to modify licence conditions and codes to promote the availability of arrangements for the sale of electricity in order to facilitate investment in electricity generation. We have heard that those powers are required for viable power purchase agreements to be offered to independent generators. We support giving the Secretary of State the powers, but we need more information about exactly how and whether they will be used.
As the Minister will know from previous Opposition amendments, we are particularly concerned—I endorse the comments made by my hon. Friend the Member for Southampton, Test—about the ability of small and independent generators to gain access to PPAs. The Government have acknowledged that the big six on their own cannot fund all the investment needed to upgrade our energy infrastructure, owing to constraints on their balance sheets and competition for capital, so independent generators will have to play a substantial role in meeting that cost. The independent generators estimate that, under the right conditions, between a third and a half of the £110 billion needed by 2020 might be provided by them.
With the removal of the renewables obligation, the big energy companies will no longer have the same incentive to offer long-term contracts or PPAs to smaller generators, which will severely impact on them and prevent them from being able to secure finance for new projects. Many of the independent generators that I have met already find that funding is beginning to dry up, and banks are telling them that they simply will not finance a CFD FIT without a PPA.
In one of our evidence sessions, Maf Smith, the deputy chief executive of RenewableUK, spoke about PPAs and queried whether a back-stop power on its own would be effective. He argued:
“The Government have said that they will create the back-stop power and then review whether they need to use that power after the first allocation period. Essentially, that is too late, however, because at that point those small independents and small generators will already have wanted to contract and seek a CFD, but they may not be at the point at which they have sought a PPA, because some will leave that until later. So at the allocation process, the Government will not know whether there is a problem—that will still be hidden. We therefore need to be clear about what the Government would do if there was a problem if that comes out.”––[Official Report, Energy Public Bill Committee, 17 January 2013; c. 170-171, Q479.]
I hope that the Minister will address those serious concerns and reassure the Committee in relation to these three questions. First, have he and his Department examined how the measures in the Bill will affect small-scale and independent generators, and is he happy that they will still be able to secure finance? Secondly, will he agree to meet independent generators regularly as the Bill progresses and measures come into force, so that he stays informed about how they are being affected? Thirdly, if small and independent generators are adversely affected by the new arrangements, will he take action to rectify such a situation and what action will he take? I look forward to hearing the Minister’s remarks.

Roger Gale: I indicated to the hon. Lady that I was more than happy to accommodate issues relating to the clause in this debate, so I do not anticipate having a stand part debate. I say that now in case any other member of the Committee has a burning desire to raise other issues.

John Hayes: We are enjoying having a range of Chairmen, which adds a certain colour and excitement to our proceedings, so I am pleased to welcome you to the Chair, Sir Roger. I come fresh and in good heart from departmental questions and, having survived an attempted assault by a superannuated peacenik, I am here and ready to do battle again.
This debate is important, and I am grateful to the hon. Member for Southampton, Test for giving us the chance to hold it. He has again done the Committee a service, because we are dealing with interesting material, particularly in new clause 4. His amendment 124 would require the Secretary of State to exercise the powers in clause 35 in a way that did not discriminate between technologies, and I understand the reason for tabling it. However, there may be a case at particular times for using different technologies, because of their scale of development. If that can be justified on the basis of the particularity or the circumstances, there is a case against treating all technologies the same and for discriminating between them.
I emphasise that because it is important to remember that the clause was added to the Bill following pre-legislative scrutiny, of which the hon. Member for Southampton, Test is aware, and in part as a result of the representations of the independent generators for whom he has made his case. This is a good example of where the Government listened to argument on what I describe as the particularity of the circumstances of different kinds of generators and different technologies and amended the Bill accordingly. On that basis, I am not inclined to offer support to the amendment, but it has provided us with the opportunity to debate at greater length new clause 4, which would establish a green power auction market.
Before I deal with some of the points made by the hon. Gentleman, I will answer the hon. Member for Liverpool, Wavertree, as a matter not merely of chivalry but of oratorical convenience. The hon. Lady asked for three things, and the arguments were well made. The first is that we look at the impact of this area of the Bill on independent generators. Such analysis is important, and we have done much work on it, but I commit today that, if we look at things again, and I will ask my officials to do so, and feel that further work needs to be done, that will happen. There is a good argument to look closely at the effect on particular kinds of generators, because I agree with the arguments made by the hon. Gentleman and others that independent generators provide an important part of the mix in the plural market that we want to create.
As you, Sir Roger, made your point about stand part, may I digress—not radically, I hasten to add—for a second? Consideration of the Bill involves much debate about liquidity. Indeed, liquidity matters. As well as creating a more liquid market, however, we must create a more plural market. Those are overlapping points, but they are not the same. The role of independent generators in pursuit of those aims is very important, not least for what the hon. Member for Southampton, Test—I listened to him carefully—identified as the likelihood of such generators to be innovative. They are likely to be the people who drive forward particular technologies and approaches to generation, so, arguably, they provide a disproportionate degree of that capacity to move forward, which he and we are enthusiastic about. I happily agree, therefore, on impact.
The hon. Lady’s second point was about meeting the independent generators. I, too, think that that matters. I had a helpful meeting with the renewables sector yesterday and, of course, we talked about this part of the Bill—we could hardly be expected to do otherwise—and, in particular, the green power auction market, which was raised by the sector. She is right that a proper dialogue with the independent sector is important, and I will commit to engage in that dialogue, both now and when what I hope will be the Act has effect, because this process is cathartic, and it is very important that we mark the changes that the legislation brings about and that we are sufficiently flexible to respond when those changes have an effect that we had not anticipated, or even an unintended malign consequence—after all, Acts can have that. That dialogue is therefore important in giving us a perspective from those most directly involved so that we can adjust our thinking following implementation.
Thirdly, the hon. Lady called for us to monitor matters on an ongoing basis. I suppose that, implicitly, I have just said we will do that, but for the sake of the record, let me say that we will, absolutely, do that. There is a risk in all these affairs that the perspective we get from the large suppliers about power purchase agreements is not the same as the perspective we get from smaller companies. It is important that smaller companies are not excluded from that dialogue or underestimated in our assessment of any impact.

Luciana Berger: I hope the Minister will forgive me for slightly challenging him, but my third point was about the action he would take. I appreciate he will monitor the situation on an ongoing basis, and the independent generators will be grateful for his commitment to meet them on an ongoing basis. However, my third point was about the action he might take to rectify the situation should independent generators be adversely affected, despite any engagement and consultation with them.

John Hayes: I do not want to prejudge what action I would take, because we would have to base any action on the character of the problem, but two things occur to me. The first is that independent generators often report that they find it challenging to navigate the system for getting PPAs and that just using the system is excessively burdensome. The second is that it is important to gauge the value-for-money aspect. In the broader matter of considering the impact, the specific matter of value-for-money analysis, or audit, is significant. I will not explore all the things we might do to adjust the system and calibrate our arrangements in the light of evidence before that evidence has emerged. However, from what we have been told, we know that independent generators have concerns about those two issues, and the hon. Lady is right that having that meeting with them would allow Ministers to gain an insight that reflected the specific concerns of specific organisations. As I say, I am happy to agree to do that.
Let me turn to some of the points made by the hon. Gentleman before I move on to the main thrust of my argument, for these—some will be pleased to know, some less so—are merely my introductory remarks. The hon. Gentleman mentioned a liquidity review. As I have said, that is one part of the way forward, and we may be able to enable those who trade directly to do so. I agree that that is not necessarily a solution in itself. However, I emphasise that there is no restriction on the powers in the clause. I think he suggested—this may be a misunderstanding—that those powers can be used only after CFDs have been introduced or when we know for certain that there is a problem, and one could argue that that is shutting the stable door after the horse has bolted. Let me be clear: we would be able to use the powers in the clause right away after Royal Assent. Given what I have just said to the hon. Lady, we will want to be analytical and considered in ensuring that any action we take matches the character of the problem. I am not suggesting we would use the powers in the way I have described, but I would not want there to be a misunderstanding that the Bill limits our ability to respond appropriately, as required.
Perhaps I should offer another reassurance. It is important, notwithstanding the arguments that have been made this morning, to note that independents will continue to invest in offshore wind as we move from RO to CFDs. DONG Energy has just announced that it will invest in and build the Westermost Rough offshore wind farm, just off the Yorkshire coast, east of Hull, which is expected to be operational from 2015.

Alan Whitehead: I merely point out that perhaps we should distinguish between those generators that look as though they are independent and not vertically integrated, but are vertically integrated on other markets, and those generators that have no possibility of integration in other markets or this market. DONG Energy is an example of the former.

John Hayes: The hon. Gentleman, with the nimbleness for which he is known, anticipated the qualification I was going to make as a suffix to that point to say that I appreciate that he will also have had in mind the smaller independents. While it is true to say that this is partly about whether the generator is independent, it is also about the type and character of those businesses, and that is precisely the point that he has just made.
The hon. Gentleman says that strike prices should not be used to favour particular technologies. The clause does not relate to strike prices, but it is important to be clear that we are not in the business of giving any single technology unfair advantage. I understand why people want to raise that, but, as I said in the House earlier, we are not in the business of making assessments about particular technologies outside of the considerations of value for money that has to be pervasive across all our thinking around what we do in market reform and in encouraging investment. Perhaps that is a further word of reassurance to the hon. Gentleman.

Alan Whitehead: An important part of the issue relating to the circumstances facing independent generators after CFDs come in is related not necessarily to the strike price, but to what they are actually achieving in terms of their discussions for marketing their product and whether they get near the reference price. If their sale of the part of the reference price is heavily discounted as a result of not having a PPA, whether or not the strike price comes in at the top in a fair way, they will have lost that gap prior to their overall sale being completed, and the strike price at that point is of no help to them at all.

John Hayes: That is a specific and good point. I quite understand the hon. Gentleman’s argument. All I would say about that though is that the Government believe that CFDs offer the opportunity for PPAs to be potentially simpler, more transparent and more accessible. They could also offer better terms mainly due to the simplification of risk management—the hon. Gentleman mentioned risk. That is obviously a salient for independents. I guess it is a salient for all generators, but it can be a disproportionate salient for independents. Our view is that the change to the system that we are putting in place will—let me put it more modestly. Our view is that the changes that we are putting in place must be of a kind that does not disadvantage independents and, more than that, should provide them with a system that they can navigate more straightforwardly, for the very reason why we seek the plurality that the hon. Gentleman advertised and advocated in his speech on this important new clause.
The reason why I will not, however, immediately accept the new clause with vigour is that, although it is important that we help those we seek to encourage to invest to come to terms with risk, we must not shield any commercial organisation from the proper assessment and measurement of the risk-advantage balance. It is rather as I said: if we were to favour a particular kind of business or technology by overcompensating for the commercial risks that organisations were bound to take, we would be subject to the criticism that we were not providing best value for money for taxpayers or consumers. It is important that we help the mitigation of risk, but we are mindful that if we go too far, costs will be passed on to consumers; they will pick up what we do in their bills, and we will struggle to justify our actions.
There are concerns. I do not want to elaborate on them at too great a length, but we are aware that the imbalance costs are difficult to predict over the long term, and could rise following an increase in intermittent generation or due to changes by Ofgem in the cash-out arrangements. We know that that, as the hon. Gentleman has argued, is likely to make it difficult to price power purchase agreements appropriately, which could affect the ability to offer long-term contracts. We know the arguments, therefore, for having this sort of provision in the Bill.
I will consider the issue further. I certainly do not rule out a similar sort of provision. I had discussions with my Department when I saw the new clause and I am prepared to look at the issue again before Report. We want to measure the implications of the approach that he has described, including the likely impact on bills that I mentioned and the incentives to contribute to the efficient management of a balanced supply system. Nevertheless, his argument has merit and I want to consider it further.

Alan Whitehead: I am encouraged by the not exactly white smoke, but the greyish smoke, tinged with some white flecks, that we have seen this morning. On that basis I am happy to withdraw my amendment. As the Minister has said that he is happy to consider the issues further before the end of the passage of the Bill, and as the new clause would be voted on towards the end of our proceedings, that would give appropriate time for further considerations to mature and emerge, fresh and formed. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 35 ordered to stand part of the Bill.

Clause 36 ordered to stand part of the Bill.

Clause 37  - Transition to certificate purchase scheme

Amendment proposed: 70, in clause37,page23,line33,at end insert—
‘(p) provision made by virtue of subsection (2)(j) must be in place for 36 months after regulations by virtue of section 2 are enacted.’.—(Tom Greatrex.)

Question put, that the amendment be made.

The Committee divided: Ayes 8, Noes 11.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: It is a pleasure to serve under your chairmanship, Sir Roger, among our cast of Chairmen. We had a lengthy debate on the amendment we just voted on, but there are a number of other issues that I want to discuss briefly, and I want to seek some reassurances from the Minister.
The transition from the ROC regime to contracts for difference is of considerable concern to many of those with projects currently in the planning process. I am sure that when the Minister met with representatives of the renewables industry, they discussed some of those concerns, so they will not necessarily all be new to him. I hope he will share with the Committee the response he has no doubt already intimated to those industry representatives.
The Minister will be familiar with the change to the fixed price instrument from 2027. Projects credited under the renewables obligation for the new fixed-price instrument will receive the same number of certificates per megawatt-hour. Price-fixed certificates will have the same value as a ROC: the buy-out price in 2027 plus 10%, index-linked to RPI. The powers currently envisaged are quite broad, so there is some uncertainty about those particular points. I know the Minister will say, and has said on a number of occasions, that some of that certainty will come in the secondary legislation. I am sure that is so, but the current drafting leaves a degree of uncertainty. While the policy intent is being set out, the White Paper and technical update are not documents that can necessarily legally be relied upon. I am sure the Minister’s comments in this instance will help to provide some clarity for those who seek it.
The second point concerns proposed new section 32P(4), which states that:
“The order may secure that the levy is not to be charged in respect of particular descriptions of supplies of electricity.”
Will the Minister clarify the intention and likely outcome of the operation of this provision? A concern has been raised that the offering of exemptions—which does not currently take place under the RO—would cause a redistribution in 2017 of costs on to consumers for all those projects which have recently entered renewable obligations. This concern has been raised with me by consumer groups and the renewables industry. Could the Minister respond to that point?
Proposed new section 32Q(6) would appear to perform the same function as clause 8(4), which we have discussed previously, in relation to CFDs, and there is the issue of whether it allows money to be paid to the Consolidated Fund. As we discussed in relation to earlier clauses, the counterparty is already able to hold funds for reserve. Can the Minister therefore explain the reason why the administrator has this ability, and in what scenarios he envisages that additional payments to the administrator would be justified? The Minister will have heard my scepticism—and I think that of others—earlier in our discussions about any clause which refers to the Consolidated Fund, the prospect of funds entering it and how they will subsequently be disbursed. A lack of clarity in these matters is rightly always of concern to Members, and it should be to Ministers—and not just Treasury Ministers. Will the Minister respond to that point?
Finally, I raise the issue of the potential for a banding review during the transitional period from ROCs to CFDs. Proposed new section 32V sets out the criteria for setting bands during the transitional period, which could then be subject to review and changed during that relatively short period. That is also a cause for concern, as developers would be unable to show with confidence the rate of support they would get for the lifetime of the transitional scheme. Will the Minister provide some clarity and reassurance on that?

John Hayes: Clause 37 inserts new sections into the Electricity Act 1989 giving the Secretary of State the power to transition from the renewables obligation to the certificate purchase scheme. Under the transition, in 2027 the current obligation on suppliers will disappear and an obligation will be placed on a purchasing body instead to purchase renewables certificates at a fixed price. It is intended that these certificates be issued in place of renewables obligation certificates, and in similar circumstances.
Renewables generators will be able to choose whether to sell their renewables certificates to the purchasing body or a third party, who in turn would then sell the certificates to the purchasing body. The purchasing body will be Ofgem, the Secretary of State or the CFD counterparty.
The hon. Gentleman asked why the administrator will be paid. Essentially, that is to provide a float before levy payments are received. As I said earlier in our deliberations, the aim is not to find a revenue-generating source—it is not a way of making money—but to make the system work more effectively.
Proposed new section 32P(4) enables exemptions to be made from the levy. For example, unlicensed electricity suppliers, which tend to be very small suppliers, are currently exempt from the renewables obligation. Electricity to be exported abroad is also exempt. We cannot rule out the possibility that other exemptions to the levy may be appropriate by 2027—for example, for energy-intensive industries or for electricity that is itself used to generate electricity for on-site use; hence this part of our proposals.
On proposed new section 32U(1)(a), there are many circumstances in which a renewables station should not get any certificates for the electricity that it generates. For example, under the RO, stations are not eligible for certificates in any month in which they use peat. Stations cannot get certificates is they are supported under the small-scale feed-in tariff, or if their period of eligibility for RO support expires. As the hon. Gentleman will know, there are more detailed and specific rules in the Renewables Obligation Order 2009; I refer him to articles 17 to 23. This provision will enable those rules to be included in the fixed-price certificate regime.
There is a case to be made as to why the certificate purchase price is not set in the Bill. Details about the fixed-price certificate have been set out in the EMR White Paper. Subject to the passage of the Bill, the fixed price will be included in the order that the hon. Gentleman referred to, which I would expect to be laid before Parliament early in 2015. As a result, that would be subject to parliamentary approval and state-aid clearance.
On that basis, we propose to set the fixed price in line with the long-term value of renewables obligation certificates, which should be automatically adjusted each year in line with inflation. I mention the date because the aim is to do this in 2015, so that developers get long advance notice of the value of renewables certificates, bearing in mind that that will be 12 years before 2027. That is contrary to what some people wondered when we began to speak of the Bill and, indeed, at the beginning of the process when the draft had been published. That will give greater certainty than is currently available under the RO. This is about allowing businesses to plan on the basis of more certainty and information, given that we know that ROCs can fluctuate depending on the relative difference between the supply certificates and the level of demand.
The Secretary of State also has the power to impose a levy on electricity suppliers to recoup the cost of purchasing the renewable certificates by the purchasing body. The levy will replace the current obligation to submit ROCs and will be in line with their share of the market for electricity supplied. I emphasise that the RO will remain open to new entrants until March 2017, at which point the length of support offered under the RO will begin to reduce. From 2017 the RO will be closed to new entrants, but all projects that are already receiving support within the RO at that time will continue to do so, subject to the maximum period of 20 years of support. The RO will close in 2030, and as that date approaches, the obligation, which is currently set annually, will be set against an ever-decreasing pool of generators.
We have listened to the views of the industry. The hon. Member for Rutherglen and Hamilton West was kind enough to repeat that I had met representatives from the renewable sector yesterday, and of course I have discussed the matter with my officials and met industry representatives before. We are committed to ensuring that the transition from the RO meets the industry’s needs. The removal of the obligation on electricity suppliers through the introduction of a fixed price certificate scheme will enable generators to access the full value of the ROC. Generators will have access to an income from certificates on a more regular basis than the current lag of up to 18 months. That should, in turn, remove the perception that a shrinking obligation might be volatile in quantity, and hence vulnerable to price volatility.
The change is important and must be considered carefully, but I am confident that the proposals will introduce sufficient certainty to allow businesses to plan, and that the transition can be managed effectively and efficiently.

Question put and agreed to.

Clause 37 accordingly ordered to stand part of the Bill.

Clause 38  - Duty not to exceed annual carbon dioxide emissions limit

Barry Gardiner: I beg to move amendment 122, in clause38,page39,line36,leave out subsection (2) and insert—
‘(2) For generating stations constructed pursuant to a relevant consent given or made on or after the date on which subsection (1) comes into force and prior to 1 January 2020, until (and including) 2029 the statutory rate of emissions is 450g/kWh.
(2A) For generating stations constructed pursuant to a relevant consent given or made on or after 1 January 2020, until (and including) 2034 the statutory rate of emissions is 200g/kWh.’.

Roger Gale: With this it will be convenient to discuss the following:
Amendment 115,in schedule 4, page109,line37 leave out ‘may’ and insert ‘will’.
Amendment 121,in schedule 4, page110,line4, at end insert—
(iii) substantial pollution abatement equipment dealing with oxides of sulphur, oxides of nitrogen, heavy metal emissions or particles is fitted to the generating station.’.
Amendment 123, in clause46,page47,line20,at end insert—
‘(f) Chapter 8 (Emissions Performance Standard).’.

Barry Gardiner: Thank you, Sir Roger, and may I say what a delight it is to serve under your chairmanship? Indeed, I believe it is the first opportunity I have had to address you as Sir Roger, and I am delighted to do that as well.
EL = RxCx7.446 is absolutely at the heart of amendment 122. I am sorry if I have lost half my colleagues already; it would not be the first time I have done so, but it would probably be the swiftest. Clause 38 states:
“The operator of any fossil fuel plant must secure that the emissions of carbon dioxide from it that are attributable to the use of fossil fuel do not exceed EL tones of carbon dioxide (“the emissions limit”) in any year”.
The clause goes on to define R and C:
“R is the statutory rate of emissions, in g/kWh; C is the installed generating capacity, in MW, of the electricity generating station comprised in the fossil fuel plant.”
The problem with the clause is that it fails to provide the necessary indicators and incentives in the market. It fails absolutely and in paramount fashion to incentivise something that I know the Minister and the Government accept is vital to our future energy security, and which I hope they accept is also vital to our future industrial and economic policy, namely CCS. With CCS, we had the opportunity to develop the Don Valley project, which was reckoned to be the No. 1 infrastructure project in the game in Europe. We were told that the Treasury had £1 billion in its budget over the next few years to support such a project. I have studied the figures. The Treasury figures show that there is £575.81 million available; £115 million in 2011-12, £172 million in 2012-13, £201 million in 2013-14, and £86 million in 2014-15, with nothing thereafter. I am afraid the £1 billion was never there in the first place, but the key thing is how to send a signal to the market that we want CCS? I hope the Minister will have strong words with his Treasury colleagues and make sure that £1 billion is there into the future, and not only that £1 billion but some of the other £4 billion that was left for this. They changed the project.
The Don Valley project was not pursued on the grounds that CCS for gas was more important to our future energy mix. In terms of UK energy policy that was understandable, because the Chancellor and the Department took a joint decision on how they would structure the market in the future which placed an increased emphasis on a dash for gas over the medium-term period. However, they failed to look more broadly at the UK economic context, and to say: what is going to be the most important element of our industrial and our export capacity? What is going to do most for our economy in a world where in the next 30 to 40 years we will see coal still at the forefront of energy in China, in India, in the whole of south-east Asia, and in Indonesia?

Dan Byles: The hon. Member might be interested to know that, according to the IEA, between 2012 and 2035 some 600 GWe of new unabated coal plant is expected to be constructed in the world.

Barry Gardiner: My hon. Friend—I call him that because we served together on the Energy and Climate Change Select Committee—is absolutely right. I am sure he is looking forward, as I am, to the forthcoming lecture in London by Fatih Birol, Director of Global Energy Economics at the International Energy Agency, where precisely these points will be made. I think we are both attending that.
Our capacity to develop CCS technology, and to be able to export it throughout the world, is critical, not just to our domestic energy supply, but to Britain’s future industrial strategy. If we are to make any real contribution to combating anthropogenic climate change, the best way is through coal CCS. Why is EL = R x C x 7.446 the secret to doing that, to unlocking CCS? It is this: subsection (2) gives a grandfathering period up to and including 2044, right up to 2045. The statutory rate of emissions would be 450 grams per kWh for the energy performance standard. That means that we will not send the right signal to industry that we need CCS. It will take out unabated coal, but in terms of our domestic supply it will not incentivise CCS for gas, which I know the Minister wants. It is interesting to see the way in which this has been broken down. If one looks at the way the Government reached their conclusions, one can go back right to July 2011, when the White Paper “Planning our electric future” said that the EPS should be set at 450 grams per kWh and suggested that the time frame for that grandfathering would be 20 years. Subsequently, the regulator looked at the issue and said that the costs of building gas-fired facilities would be recovered in 10 years to make the plants commercial and economic, and it therefore suggested that a 15-year grandfathering period would be suitable.
It was only on 17 March 2012 that there was a joint statement by the Treasury and the Department, which rather took the market and everybody else by surprise. In it, they set a time frame for the EPS that went right the way through to 2045, doubling what the regulator had suggested was an appropriate period. If one thinks of that in terms of the necessary subsidy from the Government—that is you and I, as the bill payers—in order to see a proper commercial return to the companies, which we would all wish to see, the Government have, in effect, said, “We’ll double it. We’ll go from 15 to 30 years.”
There is another problem with setting such a long time frame. Investors need certainty, and that point has been made extensively in this Committee, in virtually every debate on every amendment and every clause. However, they need certainty in two ways. They need certainty long term, and this Government’s actions have been absolutely consistent with those of the previous Government on that. Ministers have said that the long-term, 2050 targets should be safeguarded and should be sacrosanct. They have said that we should have the 80% reduction on 1990 by 2050. I commend them on that, and I wholly endorse the fact that they have maintained bipartisanship on the issue.
However, it is clear, and the Government acknowledge, that investor certainty is also medium term. That is because if it is too long term—if we talk in terms of 40 years’ time—industry will ask, “But what is going to happen in the meantime? What is going to happen in 15 or 20 years’ time? Will another Government come in and change this? Will they do something different?” That is precisely where the industry needs certainty; it needs the double lock of knowing that there is not only a long-term, backstop date with absolutely rigid targets, but a medium-term target. That will draw investment in now and provide certainty that a subsequent Administration will not change things in the light of what happens in the EU or domestically.

Dan Byles: My hon. Friend says people are worried that another Government might come in and change things, but this Government have made it clear that they will not do that. Is he suggesting that people should be worried about a hypothetical future Labour Government?

Barry Gardiner: Let me read out something that E3G sent to members of the Committee this morning. It said:
“The currently proposed grandfathering of unabated gas plant to 2045 is not credible. It is not politically sustainable in the face of continued expected domestic and international commitments to reduce carbon emissions. It is in contradiction to existing requirements for capture readiness for all new fossil plant over 300MW. It also fails to provide improved investor certainty, as alternative policy instruments could be applied within this period instead, under either UK or EU law. The 2045 grandfathering commitment…reduces the policy tools usable by government. It would further increase the costs of bringing forward CCS in competition with unabated gas rather than as part of a coherent transition strategy.”
No Government can see right the way through to the next 40 years. It is tough enough to see through the next couple of years. However, industry demands some medium-term certainty and it is important to deal with that now. I would not endorse a new Government of any flavour—theirs or ours—that came into power and said, “You know what? We are going to rip up what the last lot did. Okay, you may have started building power stations on one basis, but we think differently and so we are doing something else,” which would screw up all the investment decisions.
That would be disastrous, which is why it is right to give industry an indication of where we need to be in 2030. Then we can incentivise the investment that comes through and make sure that the time scale allows costs to be recouped and the enterprise to be seen as a commercial one at the point where companies need to make investment decisions. I hope that that answers my hon. Friend’s question.

John Hayes: We are human, and so there are contradictions mixed into our affairs, but my general advice is that it is best not to confirm that in speeches in the House. I think there is a contradictory element in the hon. Gentleman’s case, and perhaps he could clarify it. On the one hand he anticipates the early arrival of CCS, in line with the Government and the experts that we have appointed. On the other hand he complains about the period of the grandfathering. Frankly, we, like the CCS cost reduction task force, hope that CCS will be available and commercially viable before long. So why should we so worry about the grandfathering?

Barry Gardiner: The Minister is always gracious, colourful, courteous—

John Hayes: Erudite.

Barry Gardiner: He is erudite. He brings in the most wonderful references. This morning we have had Ruskin and all sorts of historical references, but on this occasion—[ Interruption. ]—I will not say uniquely, but he has been uniquely uncogent and uncharacteristically inchoate.
He has accused me of inconsistency in proposing the amendment, in that I say we want to encourage CCS but fear it may not come along. My fear that it may not come along stems precisely from the fact that the grandfathering arrangement goes on till 2045.
Why would a commercial gas or coal operator build a plant knowing that they could go on until 2045 at 450 grams per kWh and then, once the technology is available—goodness who knows who will develop it, as there is no incentive to—simply say, “You know what? We will spend all this extra money to lose money on our production, in terms of our energy productivity, by fitting it with the CCS capacity”? That would be insanity, and the Minister knows it.
The whole point of the early point of 2029 for the grandfathering limit of 450 grams per kWh is precisely that the investors will see that it is worth investing in developing CCS technology now, because they will want to be able to run their plant with it when the limit kicks in. The Minister knows that, and I will happily give way to him if he wants to clarify his remarks.

John Hayes: I will have my turn in a moment.

Barry Gardiner: I am sure that the Minister will have his turn in a minute.

Roger Gale: I have to tell the Minister that that will depend on whether he catches the Chairman’s eye.
 Sir Robert Smith  rose—

Barry Gardiner: I give way to the hon. Gentleman.

Robert Smith: There are other levers to motivate CCS, including contracts for difference, the emissions trading scheme and the setting of a proper price of carbon across the European Union. We have to ensure that those other levers must be used effectively and appropriately to ensure that the CCS succeeds.

Barry Gardiner: I must have been drawing up my amendment in the very same room as my hon. Friend the Member for Southampton, Test, because obviously the hon. Member for West Aberdeenshire and Kincardine was looking over my shoulder also. The driving rationale for the Government’s approach to the EPS has been as a back-stop for emissions from new coal plant, with CCS performance incentivised primarily by CFDs and the carbon price.
In the DECC EMR White Paper, the Government recognise that they might wish to revise the EPS in future to drive further emissions reductions and the deployment of CCS. They explicitly state that the existing requirement under the Energy Act 2010 to review progress on CCS and power sector decarbonisation on a three-yearly basis could be used for that purpose. However, that was not considered in the first review report, which was published in December 2012.
Previous consultations considered EPS levels of 450 grams per kWh and 600 grams per kWh, both of which are higher than emissions from the most efficient unabated gas plant, particularly if energy from heat were to be accounted for, and neither of which would require CCS to be applied to gas plant—I am sure that the hon. Member for West Aberdeenshire and Kincardine acknowledges that point. The signals sent to investors to date have been that investment in unabated gas is being encouraged over investment in CCS, either for coal or for gas. If the hon. Gentleman wishes to come back at me on that point, I will be happy to listen to his arguments, but I think he will acknowledge that as things stand, the problem is that the CFDs and the carbon price alone will not be enough to incentivise and drive through the new technology of CCS that is so badly needed.
CCS on gas would allow for higher load factors than the marginal peaking role that has been envisaged under other scenarios. That is also important, because we want CCS gas to be productive and a part of that mix, but we have to ensure that we drive out emissions from the system as much as possible.
I started by talking about the way in which these revisions to the formula will incentivise CCS capacity and the importance of that to our industry. I think I have used the analogy before, but we must consider the matter not like a phlebotomist looking at the blood supply—the energy supply—of the economy, but like a doctor looking at the organism of the British economy.
The risks to industry and consumers of a gas-heavy pathway are considerable. Many hon. Members in the Committee today have high hopes for shale gas and some are deeply sceptical, but many see a future role for gas in this mix that increases dramatically. The analysis by Redpoint Energy, the consultancy used by DECC, shows that the maximum increase in the cost of power in scenarios with increased support for low-carbon generation is 8% by 2030; the same analysis shows that the maximum increase in the cost of power under high gas scenarios is 98% by 2030. Those are not risks that UK businesses or UK household bill payers can afford to take. That is why the amendment is so important: it is a back-stop against those high price rises. Again, I emphasise that these figures have been modelled by the Department’s own analysts, Redpoint Energy, so I know the Minister will take them with his customary seriousness.
At this point, I want to bring in amendment 123, which proposes that the EPS be included in the review process. To the list in clause 46(1), which provides for
“As soon as reasonably practicable after the end of the period of 5 years beginning with the day on which this Act is passed…a review of…
(a) Chapter 2 (contracts for difference);
(b) Chapter 3 (capacity market);
(c) Chapter 4 (conflicts of interest and contingency arrangements);
(d) Chapter 6 (access to markets);
(e) Chapter 7 (the renewables obligation: transitional arrangements)”
we believe it is important to add:
“(f) Chapter 8 (Emissions Performance Standard).”
That is because this debate is not simply about CCS, not simply about the wider British economy, and not simply about businesses and consumers being hedged against the much higher energy costs that they might otherwise incur from a high gas scenario strategy that the Government are going for. It is also fundamentally about meeting our carbon targets and our emissions reduction targets.
The Minister knows well that, in his oral evidence to this Committee, David Kennedy, chair of the Committee on Climate Change, was very clear about the carbon budgets that have been set and the projections. In response to a question, which I think I asked, about whether it was necessary to have a 40-60 grams per kWh level in the Bill, he clearly indicated that that would be extremely helpful but he added a caveat to that, which quite surprised me. He said that up to 100 grams per kWh would be compatible with maintaining a trajectory that could reach the 2050 goal at the appropriate time, but what he was very clear about—what is absolutely clear—is that 450 grams per kWh busts our carbon targets apart, not just in 2050 or 2045, but in 2030 as well.
When he considers the amendments, I urge the Minister to think about more than our energy security. We want to incentivise generators to come on with new gas supply, to get us over that point in 2017 or 2018 when we know that there will be difficulties with the margins, as the regulator has already told the Committee. None of us wants supply to be constrained—none of wants the lights to go out, as the public would say. All of us understand why the Government, to ensure that that does not happen, have said that they need to bring on a form of generation that is capable of coming on to the market quickly, and that they need to show the investors in that form of generation that there is the opportunity to recoup their investment and recover their costs in a reasonable, commercial way.
The amendments would allow precisely that: new generation capacity—that is, gas capacity—could come on to the market in the sure and certain knowledge for investors that, as long as that is done before 2020, they will have the ability to recover their costs through to 2030, so it is commercially viable for them to invest. That would give a fair incentive to the market and deal with the issues of security of supply; it would also protect consumers by incentivising CCS and bringing through that new technology, which is greatly needed for our export capacity, for the wider economy and also within our own economy.
The figures I gave on the projected increase in costs with a high and a low gas strategy bear my argument out. CCS is a tremendously effective hedge against a 98% rise in costs, which none of us wants, and it is vital not just for protecting consumers or ensuring our security of supply, but for delivering economic growth and, finally, for decarbonising our energy sector. That sector is the most important to decarbonise in, because that will be vital to our meeting our long-term targets. The only way we will get that decarbonisation is by setting clear benchmarks and grandfathering limits that allow investors to make a decent return on their investment and do not prejudice the commercial sector, yet also make a clear statement that generators will not be able to go on producing at 450 grams per KwH after 2030.

Ordered, That the debate be now adjourned.—(Joseph Johnson.)

Adjourned till this day at Two o’clock.